Tougher Bank Capital Standards Could Benefit Credit Unions

New Basel III standards have prompted banking regulators, including the FDIC, to propose tougher capital rules on banks of all asset sizes that could hamper the for-profit institutions’ ability to fund commercial real estate.

Specifically, large and community banks would be subjected to a 150% risk weight that would apply to some loans that finance the acquisition, development or construction of commercial real estate, according to proposed rules posted on FDIC’s website.

Banks have complained in trade publications that those struggling to meet new capital benchmarks will have to reduce business lending as a result.

“Of course it will give credit unions an opportunity,” said NAFCU President/CEO Fred Becker of member business lending.

However, Becker said that the extent to which credit unions can leverage decreased bank business lending will depend upon current legislation that would raise the member business lending cap from 12.25% of assets to 27.5%.

“Absent the cap, we could obviously do more,” he said.

Rex Rollo, executive vice president of operation/support at the $5.4 billion America First Credit Union of Riverdale, Utah, agreed that the new Basel standards could benefit credit unions, and he would welcome it.

“We are always open to commercial lending,” he said.

Rollo said the 12.25% cap is not restricting his 570,000-member credit union’s ability to make business loans. However, he cautioned that, as the new Basel standards suggest, commercial loans bring with them higher risk onto lender balance sheets.

“Just because it might become easier to grab, doesn’t mean we’ll try to grab a big market share,” Rollo said. “Especially right now, because even though the economy is getting better, commercial is not that strong in our area. We won’t be aggressive about it, but we will be there for members it would make sense to lend to.”

Devin Blum, president of Potomac Business Services LLC, a business lending CUSO located in Kensington, Md., said although new Basel standards might result in some short term credit union gains, he doesn’t see it having a long term effect.

“For me, the bigger issue is how credit unions and their regulatory agency position themselves in market for the future,” he said.

Specifically, Blum takes issue with Reg 723.7(b), which requires that business principals “provide their personal liability and guarantee” when obtaining a credit union business loan.

Private equity firms, which back high-quality assets, are unwilling to give a personal guarantee and will go elsewhere for funding, he said.

That leaves credit unions competing for borrowers that are required by banks to provide personal liability, which usually means the loans are of lower credit quality.

“The NCUA shut off the juiciest part of the middle market,” Blum said. “Now, instead of hunting for potential gold nuggets, credit unions are scrounging around in the dirt, looking for gold dust.”

Lending to borrowers that qualify for SBA loans is fine, Blum said, but credit unions should have more options.

The business lending cap is a concern, he said, as is the rule that prohibits credit unions from charging pre-payment penalties to members.

“What that means is that your portfolio tends to be more liquid over time, and you have to replenish principal in any given loan pool more quickly than a bank would,” Blum said. “Stronger credit leaves so you have to find credit of equal credit strength to replace it, which is hard to do because the market is so competitive.”